Let’s admit that the monthly non-farm payroll report is among the most
difficult for economists to forecast. The are not many reliable
inputs as it is the first piece of real sector data for a new
month.
Nevertheless, it is an important piece of economic data, and which, as we
saw earlier in the year, a significant downside miss could freeze the Fed.
There are four data points that suggest that a strong September jobs report,
to be released on October 7.
1. Weekly initial jobless claims have fallen about 10k whether using a
four-week moving average or comparing the
survey weeks.
2. There were about 50k more people than average who missed work in
August due to the weather. The lion’s share will likely have returned.
3. The Conference Board’s measure of consumer confidence showed the
gap between jobs plentiful and hard to get rose to 6.3 (from 4.0) and is the
highest since August 2007.
4. Income tax withholding in September is running almost 6% on average
higher than in August.
Some other details of the jobs report may also be constructive.
The average weekly hour’s works are expected to rise by 6 minutes, which does
not sound like a lot, but when there are 157 mln
workers, it turns out to be 457k full-time equivalents. Average hourly
earnings are expected to rise 0.2% for a 2.6% year–over-year rate, which is
the upper end of the where it has been since 2010.
The under-employment rate has steadied around 9.7%. It remains well above pre-crisis levels when it
was closer to 8%. There does appear to be a structural shift in the
economy, not just in the US but globally. Less educated and less skilled
workers are at a clear disadvantage. There are various reasons why this
might be the case, including global competition and technology. Consider
that unemployment for those with a college degree in the US stands at
2.5%. With a high school degree, but no college, the unemployment rate is
more than double at 5.5%. Those without a high school diploma, the
unemployment rate is more than three-fold higher than for college-educated
(7.7%).
We read the recent FOMC statement and the dot plot to mean that the bar
to a December rate hike is low. The data does not have to improve
much for the Fed to act. Our back of the envelope
calculation suggests the US economy created a little more than 200k jobs in
September. The jobs report we expect will be more than sufficient for the
Fed to hike rates this year.
That said, we think the odds of a November hike are next to nothing, even
though Bloomberg calculation puts it at 17% today. There is no
precedent for a rate hike a week before a national election.
We think that the partisan claims that the Fed has not raised interest rates
because of its politics are wide of the
mark. The arguments offered by Governors Brainard and Tarullo and Chicago
Fed President Evans for even more caution
than the Federal Reserve has shown are based purely on economic analysis.